Despite a slowdown in activity in Vietnam during the first half of 2016, growth prospects remain strong due to record levels of Foreign Direct Investment (FDI) and strong domestic fundamentals, according to ICAEW’s latest Economic Insight: South East Asia report. FDI is on track for another record year in 2016 – attracted by low costs, improving infrastructure and skills, and a deregulated business environment increasingly open to 100% foreign ownership.
ASEAN economic outlook remains reasonably positive despite gloomy global economic and political volatility. Recent data point towards a pickup in trade for several economies like Vietnam and Singapore, and ASEAN central banks may be able to ease policy to support growth.
The key external risk to ASEAN growth in the next couple of years is the potential for a slowdown in credit growth in China. This would weaken global demand for raw materials, key exports for Indonesia and Malaysia. Additionally, China’s demand for goods imported from Vietnam would suffer, as would Chinese tourist flows to Thailand, and Singapore’s activity as a transport and logistics hub for all of the above sectors.
As a key trading region, ASEAN economies will also be closely following trade policy debate in the US, ahead of President Trump’s inauguration.More positively though, ASEAN is relatively insulated from the effects of a ‘messy Brexit’ in the UK.
ASEAN economies are also vulnerable to a more generalised slowdown in globalisation or an erosion of the broad consensus in favour of free trade. Many economies in the region such as Vietnam have been highly successful in moving up the global value chain as a result of the opportunities presented by free trade and investment flows.
“The government has brought forward a number of projects to boost near-term growth, but there is limited room for additional fiscal stimulus and the budget deficit has widened significantly,” said Priyanka Kishore, ICAEW Economic Advisor & Oxford Economics Lead Economist, “Vietnam’s ongoing economic success clearly depends a lot on continuing to have increasing opportunity to trade with higher-income economies, as well as access to investment finance and technology.”
According to the Oxford Economics/Control Risks Economic and Political Risk Evaluator, the region performs relatively well on measures of political, economic, exchange rate and credit rating risks compared to other major emerging markets. However, business environment ranks poorly in most ASEAN economies, particularly in the Philippines, Indonesia and Vietnam, which remain furthest from global ‘best practice’ according to the World Bank’s Doing Business 2017report.
Mark Billington, Regional Director, ICAEW South East Asia, said: “In recent years, Vietnam’s growth has been driven by the influx of FDI. Deals like the Trans-Pacific Partnership (TPP) are important not only for their potential to directly boost trade and investment flows, but also to help embed good business practice in signatory countries.If momentum towards the ratification of deals seems to be slowing, governments and businesses should look at alternative measures to improve business environments.”
Other findings in the report include:
· Recovering commodity prices to support Indonesia’s GDP growth of 5.1% in 2017
· Global trade recovery key to 4.3% GDP growth forecast for Malaysia in 2017
· New wave of protectionism poses threats for export-dependent Singapore
Economic Insight: South East Asia is produced by Oxford Economics, ICAEW’s partner and economic forecaster. Commissioned by ICAEW, the report provides its 147,000 members with a current snapshot of the region’s economic performance. It undertakes a quarterly review of South East Asian economies, with a focus on Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
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